Stablecoin issuer Tether recently surprised critics. Accounting company Moore Cayman, part of the Moore Global accountancy network, attested that Tether had enough assets to back its liabilities.
Tether fans were quick to celebrate the attestation report on social media while critics cast doubt on it.
As well versed as the cryptocurrency community is in abstruse matters of confirmation times and chain forks, it is not as well acquainted with the obscurities of the accounting profession. To understand how an attestation brings value to a stablecoin, we need to delve a bit into the accounting.
People drawn to cryptocurrency tend to be skeptical of centralization. Stay in crypto long enough and odds are you’ll have been hacked or scammed. All of this makes for a fairly suspicious lot.
No wonder that stablecoin issuers, which keep reserves at traditional banks, have become magnets for doubt. Cryptocurrency users, long habituated to verifying everything on a blockchain, can’t get any insight into the nature of the assets backing stablecoins.
To allay these suspicions, stablecoin issuers including Gemini, Circle, and Paxos have adopted the practice of issuing periodic attestation reports. Each month the issuer asks its auditor to form an opinion on the value of the reserves used to back the stablecoin. The auditor’s opinion is published on the issuer’s website for everyone to see.
But not Tether.
Tether, the company behind the largest stablecoin, USDT, has never bothered with the practice of securing regular attestations from accounting companies.
This omission has only fueled percolating speculation that Tether’s assets were lacking. For years Tether has been dogged by rumors it doesn’t have enough investments to back the stablecoins it has put into circulation. In statements to the New York Attorney General’s office in 2019, the company admitted that only 74% of its assets were held in the form of cash and cash equivalents, the other 26% being a loan to help out its ailing affiliate, Bitfinex.
Even though Tether has provided very little transparency, that didn’t stop the cryptocurrency community from building up a big dependency on the stablecoin (with almost USDT worth $50 billion now issued). Binance and other centralized cryptocurrency exchanges in Asia rely on tether stablecoins in place of actual dollar accounts. Meanwhile, decentralized finance tools have gobbled up large amounts of tether as a stable form of collateral.
This has created a strange situation in which the very same community that champions the moniker “don’t trust, verify” is actually doing a lot of trusting, not verifying.
Tether’s attestation report and its promise to provide more reports going forward is a move in a new, and much better, direction. By providing more transparency to end users concerning the value of its assets, Tether is making an effort to bring itself up to industry standard.
But many in the cryptocurrency community remain skeptical. How solid is an attestation?
The accounting industry’s role is to provide the public with a degree of assurance about the quality of a corporation or organization’s information. The most intensive level of assurance is provided by an audit.
In an audit, the auditor’s customer begins by asserting something like “here are my quarterly financial statements” or “here is the value of my stablecoin reserves.” And then the auditor examines the assertion by carefully gathering evidence. Once it has completed its audit, the auditor publishes a letter with its opinion on the accuracy of management’s claim.
When Tether hired Moore Cayman to verify its reserves, Tether asserted that it had total assets of “at least US$35,276,327,156.” And then Moore Cayman examined this claim using the same standards that it would have if it were tasked with auditing Tether’s annual financial statements.
Auditors aren’t supposed to blindly rely on management’s representations. They corroborate information by not only verifying that the actual numbers are correct but also testing the client’s internal systems and procedures to ensure they are working properly.
In the case of a stablecoin attestation engagement, a prudent auditor would go beyond checking with the stablecoin’s banker that account balances are sufficient. Testing the stablecoin’s smart contracts and observing its minting and burning functionality would also be key to forming an audit opinion.
Accounting firms are not perfect. The Public Company Accounting Oversight Board (PCAOB) is the U.S. public agency responsible for auditing the auditors. In the PCAOB’s most recent round of inspections, 25% of public company audits had some sort of deficiency.
Deficiencies do not necessarily mean the auditor’s final opinion was wrong. Only 3% of the audits the PCAOB inspected had deficiencies leading to an incorrect opinion. Also, the PCAOB chooses the riskiest audits to inspect, so its findings are not indicative of average audit quality.
In Canada, the Canadian Public Accountability Board (CPAB) has many of the same responsibilities as the PCAOB. During 2020, the CPAB found that 29% of the audits it inspected were deficient in the application of generally accepted auditing standards. Out of the four largest firms, only 8% of inspected audits were deficient, attaining the CPAB’s 10% target.
So examinations are not 100% trustworthy. Auditor EY’s failure to spot fraud at Wirecard for a full decade is a reminder of this. Even so, audits remain the best source of non-blockchain assurance that we have. A stablecoin that publishes an attestation report from an auditor is safer than one that doesn’t.
Unfortunately, the degree of information that Tether revealed in its attestation engagement is disappointing and falls short of what competing stablecoin issuers have chosen to reveal.
According to CoinDesk’s Nikhilesh De, Tether will provide quarterly attestation reports. That means for the intervening 89 days, a cryptocurrency user can only guess the status of Tether’s reserves.
Compare this to competing stablecoins like TrueUSD and TrueGBP, which provide 24/7 real-time reserve attestations courtesy of auditor Armanino. Can’t sleep on a Saturday night and want to see if your stablecoin is still well backed? Armanino will provide an attestation. (TrueUSD’s attestation functionality is temporarily disconnected as it goes through a change in ownership.) The brainchild of Armanino’s Noah Buxton and Jeremey Nau, 24/7 attestations rely on application programming interfaces, or APIs, that pull information every 30 seconds about the stablecoin’s reserves from its bank account.
Tether’s attestation report is also disappointing because it only provides information about the quantity of its reserves, not the quality.
In competitor stablecoin Gemini’s attestation report, Gemini asserts that its reserves are held in accounts at State Street Bank within a “money market fund managed by Goldman Sachs Asset Management, invested only in U.S. Treasury Obligations.”
That’s an impressive amount of transparency.
In the case of Paxos Standard, it attests that its reserves are held in the form of deposits at U.S. depository institutions or in the form of U.S. Treasurys.
But Tether only makes an assertion about the total size of its assets. Unlike Gemini and Paxos, it tells us nothing about their composition. Is it holding safe Treasury bills? Dogecoin?
So while it is certainly good news that Tether is catching up to its competitors by providing attestation reports, it remains the laggard when it comes to transparency. Not all attestation reports are equal, and Tether’s remains the least informative of the bunch. For now, at least.